The high increase in popularity of the infamous LOL (laughing out loud) was not enough for the teenage, trying to be cool, defying mom and dad, often emo generation. They had to come up with something even cooler and that's how LOLZ was born. Some say that Z stands for S, therefore it's the plural version of LOL. But let's analyze that thought process a bit. The plural of LOL would be translated as "laughing out loudS" or "laughingS out loud" which, for the few of us who are at least trying to be grammatically correct makes as much sense as "z" being used as a replacement for "s".
In this case, the Z could be interpreted as the initial of a completely different word. Possibilities:

1. Laughing out loud ZBANG! - this would indicate that the violent laughter has caused the person to fall and hit the ground, thus creating a loud sound;
2. Laughing out loud ZTUPID - seeing as Z is so often used as a replacement for S, it makes sense. It's also a very positive thing, when you consider that admitting you have a problem is the first step to recovery;
3. Laughing out loud ZENITH - the person doing the laughing has entered a state of astral trance...

Everybody else here is entirely incorrect, and it's unbelievable to what a degree.

"LOL" is the signular form, and "LOLZ" is simply the plural.

Meaning "lol's" or more than one "lol".

Adding a lowercase "z" at the end (Proper form, LOLz, or LoLz to switch between capitals and lowercase as is commonly done by a number of prepubescent horny teens, namely girls) does not necessarily add another word to the acronym. Just like if I were to write to you about "STDs", I would not be talking about Sexually Transmitted Disease Succotash, but rather multiple Sexually Transmitted Diseases.

Treating lol as a verb (to lol), the he/she/it conjugation of lol in the present indicative tense is 'lols', (i.e. I lol, we lol, he lols).
Using the leet practice of replacing 's' with 'z', this is corrupted to 'lolz' (I lol, we lol, he lolz)